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RAND Corp: Health plan consolidation may lead to lower hospital costs

Increased consolidation of health plans could benefit consumers by helping to drive hospital costs lower, according to a new study by RAND Corp.

Researchers for the report found that hospital costs in metropolitan areas with the fewest health plans were approximately 12 percent lower, a finding the study authors contend shows that bigger health plans can more effectively negotiate lower prices from healthcare providers.

"There may be a benefit for consumers when health insurance plans are more consolidated because it tends to drive down hospital costs," said Glenn A. Melnick, an economist at RAND, in a press release. Melnick is also the Blue Cross of California Chair in Health Care Finance at the USC School of Policy, Planning and Development. "As long as there is enough competition to keep health plans honest, the consolidation has a good result on prices."

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The findings run counter to what many hospital operators have contended in the past: namely increased consolidation among health plans would provide them with too much power in the marketplace and that in their attempts to suppress the cost of healthcare in those markets, insurers might also be harming the overall quality of care.

For this study, the RAND researchers used data from 2001 to 2004 about health plans, hospitals and healthcare costs in metropolitan areas across the country to determine market concentration among both health plans and hospitals. Using this information, researchers created models to examine the impact health plan consolidation had on hospital costs. It did not examine fees charged by health plans.

The results showed that most hospitals operate in markets where health plans are not very consolidated and that only 7 markets showed a high level of consolidation and that in nearly 90 percent of the metro markets the level of consolidation among hospitals exceeded the level of health plan consolidation.

[See also: More hospital mergers on tap in 2011]

"Our findings suggest that if policymakers are interested in lowering costs, they should find a way to restore competition among hospitals, in addition to assuring competition among health plans," Melnick said. "There has been great consolidation among hospitals and physician practices, and that consolidation has allowed hospitals and doctors to raise prices."

Support for the study was provided by the Robert Wood Johnson Foundation's Changes in Health Care Financing and Organization initiative.